Nio Remains a Hard Sell, But Tread Carefully

Rumors of a major investment from China's Geely could bring volatility to the Nio share price

What’s the next move with Nio (NYSE:NIO) stock? Like its rival Tesla (NASDAQ:TSLA), the Chinese-based electric car maker remains a “love it or hate it” stock. On the long side, bulls continue to believe in the Nio story. On the short side, bears continue to point out Nio’s cash troubles.

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But, as of late, the bulls have been winning the battle. Nio stock has been on a tear since last fall. Since then, plenty of things have worked in Nio’s favor. Strong delivery results in late 2019, for one. “Teslamania” moving EV stocks higher is another. Third, short-sellers covering their Nio positions has also sent Nio shares higher.

Yet, there’s plenty of ammo for Nio stock bears. The company had to recently resort to dilutive convertible debt financing to raise capital. This helps the company meet short-term obligations like payroll and interest payments. However, it could indicate Nio is on the path to continued dilutive debt offerings.

What About Nio’s Underlying Performance?

Despite real concerns over its solvency, Nio stock is up almost 62% since Dec. 27. Shares have dipped a bit after recent financing announcements. Yet, bears continue to lose as investors remain pumped about Nio’s future prospects.

However, what about the coronavirus from China’s impact on the company? The crisis could devastate the Chinese economy. With manufacturing impacted thanks to the crisis, it seems logical this would impact Nio’s production operations. It also doesn’t seem like a great environment for automotive sales.

As Chinese auto sales remain weak, it’s hard to see Nio’s operating performance improving. With the company’s large cash burn, solvency remains a major issue. Recent financing deals may keep the company alive. But the dilutive nature of the offerings could mean additional downside.

‘Financing Secured’ Remains a Mixed Bag

Nio stock bears love to bring up the company’s issues meeting payroll. The company delayed paying salaries earlier this month. It also tried to pay employee bonuses with restricted stock. Yet, the company may be able to say “financing secured,” at least for short-term obligations.

Firstly, Nio sold $100 million worth of convertible notes in two separate transactions. These notes convert into Nio stock at $3.07 per share. Secondly, the company announced a second placement last week. Another $100 million was raised via this deal. These notes also convert into Nio stock at $3.07 per share.

Nio has said other financing deals are in the works. But these deals indicate to me Nio can’t find the big strategic investment it needs. Instead, it plans to dilute shareholders just to keep the lights on.

As debtholders convert these newly issued notes into discounted Nio stock, shares could fall as they cash out. In other words, a death spiral financing scenario. Yet, Nio is a much larger company than your typical “death spiral” target. In addition, if recent rumors are true, the company could catch a break.

As of this writing, Chinese media organizations were reporting on a rumored $300 million investment into Nio by Chinese automaker Geely (OTCMKTS:GELYY). With both companies declining to comment, we shall see whether these rumors translate into a big capital infusion.

Odds Remain Against Nio Stock, But Don’t Bet the Ranch

Again, I reiterate that Nio stock is a sell. Chinese electric vehicles have a strong future. But, chances are that other EV makers will reap the benefits. As the company resorts to convertible financing to meet short-term liabilities, it’s hard to be confident financing is truly “secured.” In addition, the ongoing impact of the coronavirus on the Chinese economy could spell additional doom for this stock.

Yet, I wouldn’t turn hog wild going against Nio stock. With the rumored Geely investment hitting the wires, Nio’s fortunes could turn on a dime, sending shares higher. But after last month’s rumored GAC investment that went nowhere, I’m waiting on the press release until changing my mind.

Thomas Niel, InvestorPlace contributor, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.